20:00 GMT- May 4 (global-view.com) With virtually all markets back Tuesday, except Japan which is in its Golden Week holidays, the focus was on the Euro-zone debt contagion. The EURUSD bore the brunt of growing worries about the Iberian peninsula (Spain and Portugal). Also there are concerns that Greece could start to run out of funds again by 2012. This risk is not lost on some members of the German Bundestag (Lower House), who are considering approving the bailout package for Greece at the present time. Odds are the plan will pass, but popular opposition to bailing out the periphery of the Eurozone is strong.
Important as well could be the reaction of the Greek populace this week to the prospect of severe budget cutbacks. Interestingly today, yields on short-term German government notes fell sharply on what we assume was a flight to safety into German instruments within the Eurozone. Both the Spanish FinMin and the IMF denied early rumors that Spain has requested financial help.
The U.K. manufacturing PMI was stronger than expected today. Overnight the Reserve Bank of Australia hiked rates by 25bps to 4.50% as expected, but them signaled a policy pause. The next major central bank to raise rates likely will be the Bank of Canada.
The EURUSD is lower. The GBPUSD is weaker, while the EURGBP is lower. The Greek bailout plan has advanced. There still a number of pieces to the puzzle. All markets are keeping a sharp eye on Eurozone credit default swaps.
In the GBP, traders are focused on the May 6 U.K. election. Tory candidate Cameron appears to be gaining. GBP dealers are watching the election headlines. PM Brown might have made a fatal pre-election gaffe. Latest polls suggest odds for a hung Parliament may be falling. If no party wins a clear majority on Thursday, difficult decisions could be deferred. This uncertainty has the GBP in play.
Our bias for the EURUSD and GBPUSD is bearish. The outlook for the EURGBP is a toss-up.
The EURCHF is trading steady. SNB intervention tactics now see the central bank continuously in the markets supporting the EUR vs. the CHF. Weakness of the EUR vs. the CHF is a bad omen for the EUR.
The USDJPY pair is lower and the EURJPY cross is lower. Rating agencies warn that Japan's public finances are a worry. Some note that virtually all JGB bonds are owned by the citizens of Japan. The Hatoyama government wants a lower exchange rate and is pressuring the BOJ to promote growth. Some traders focus intently on the Japan vs. U.S. 2-yr note spread (only the U.S. 2-yr moves much).
The risk trade has been on and off in the commodity currencies (CAD, AUD and NZD). They are all lower now. The trio are seen as an anti-EUR trade. As expected, the RBA raised its cash rate target to 4.50% (+25bp), but the central bank also signaled a policy pause. Bank of Canada interest rates could be hiked on June 1. Monetary officials have little concern about CAD strength. A strong currency eases the pressure from the central bank to tighten policy aggressively. Oil and gold are down. We favor the AUD and CAD fundamentally.
Far East equities closed lower. European bourses ended down. U.S. equities are sharply lower. The U.S. 10-yr last 3.62%, -8 bps. Bonds are a counter to risk trades because risk investments must be financed. When the cost of money moves up (higher interest rates), the return and allure of risk trades such as equities falls.
UPCOMING DATA HIGHLIGHTS: Wednesday will see the final Golden Week holiday in Japan. In Europe, EZ Service PMI data are due. Eurozone retail sales data are also awaited. In North America, U.S. mortgage statistics, ADP private employment data and the Service PMI are slated. Weekly EIA energy data are also on the docket.
See ECONOMIC CALENDAR for a complete list of future forex market events and consensus data estimates. Go to the forex forum for up-to-date market developments and technical trading ideas.
John M. Bland is an author and co-founder and partner of Global-View.com. Prior to Global-View.com, he was a forex trader and a private-label forex analyst for a top Fed watching service in NYC. He has been a corporate forex advisor and also worked in international liability management for a major N.Y. money center bank. John holds an MBA from the University of California at Berkeley and a B.A. in International Economics from that school.
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